It’s no coincidence that hundreds of major companies across the U.S. announced plans to lay off thousands of workers the day after the elections. While the president continues to promote a ‘tax the rich’ approach many don’t realize the difference between taxing income and taxing investment dividends.
This week Maria Bartiromo joined the “Meet the Press” round table for discussion on the fiscal cliff debate currently ongoing and zeroed in on just this issue.
After speaking on the necessity of Social Security and Medicare reform Bartiromo stated: On taxes, you really can’t put all of the taxes into one category. Dividend taxes for one is probably the biggest threat to the markets and the economy right now when you’re just looking at taxes. And dividend taxes are not a rich tax, nor are capital gains. You’re talking about pension funds, 401(k) plans, invest in companies that pay dividends. If you’re expecting a dividend tax to go from 15 percent to 44 percent, that completely removes the opportunity or the incentive to buy dividend paying companies. And that’s going to hurt not just the rich. That’s going to hurt everybody if, in fact we were to see that. That’s very dangerous, and it is going to create a massive selloff.
Investing in businesses comes with inherent risk. The riskier the investment the greater the potential rewards. But with that is the caveat, if the potential rewards are offset by increased taxes more people will look at other places to put their money. If fewer people (including investment/retirement plans, pension funds, etc.) invest in businesses because of the increased taxes on dividends the companies will not be able to grow and expand.
A ‘tax the rich’ mantra is not nearly as simplistic as the president makes it sound.
The problem with Ms. Bartiromo’s argument is that she doesn’t know how pension funds and 401(k)’s are taxed. The pension funds and 401(k) accounts are NOT taxed on dividend income or any other income. The assets in these retirement vehicles are taxed only when they are distributed to beneficiaries, and then at the beneficiary’s ordinary income rate. The ordinary income rate applies whether the pension fund or 401(k)’s assets are due to dividend income, investment income that would have qualified for long or short term capital gains treatment or ordinary income. I’m frankly shocked that: (1) Ms. Bartiromo as a prominent financial report doesn’t know this, and (2) that Jim Cramer and Grover Nordquist sat by and didn’t correct such an obvious error. For the tax treatment of retirement plans, please consult this IRS publication: https://www.irs.gov/publications/p17/ch10.html#en_US_2011_publink1000171813